Florence Chong's picture

AS the developed nations print money to crank up their economies, the growing economies of Southeast Asia are bearing the brunt of the fallout — in the form of appreciating currencies and tension between governments and their central banks. With the baht at a 16-year high, Thailand is a case in point . . .

THE Thai baht, the Philippine peso and the Indonesian rupiah have all appreciated, causing unease among central bankers and governments alike.
The rupiah has been appreciating since 2009, and is up a further 0.31 per cent to 9,680 against the US dollar since the beginning of this year.
The peso, which touched a four-year high against the Greenback last September, is still flirting around that level. With the recent rating upgrade for the Philippines, the peso risks moving higher.
And the Thai baht is trading at a 16-year high at 296 baht to the US dollar — up seven per cent since the beginning of 2013. It has eased slightly in recent days, due to intervention by the Bank of Thailand (BOT), but remains at an uncomfortably high level for Thai manufacturers dependent on a low exchange rate to hold their competitive edge.
Foreign capital is chasing growth in emerging economies. While some money has come through in the form of foreign direct investment, some has gone into Asian bonds and stocks.
Nonarit Bisonyabut, a research fellow with the Thailand Development Research Institute (TDRI), says: "I sympathise with the central bank, but it is a tough problem with no easy solution.
"It is quite normal for the Thai currency to be a little overvalued, because the US dollar, the Euro and Japanese yen are weak. In such a situation, we expect more money to flow into Thailand because money will always seek higher interest rates and returns."
Nonarit says that, in the past, financial crises have affected one or just a few countries, but, since 1997, crises have had a contagion effect on the global economy.
"So we are facing a new set of problems," says Nonarit. "I sympathise with BOT.  Of course the high baht affects industry, but on the other side, there is no clear solution — as to how to solve that."
One suggestion is capital controls, a drastic step taken by the Philippines and Brazil, but even this has failed to temper the rise of their currencies.
Thailand has tried capital controls before, but Nonarit says listed stocks dropped around 30 per cent as foreign investors deserted the Thai market.
The BOT and Thai Finance Minister Kittiratt Na-Ranong are embroiled in a war of words on how to deal with the appreciating currency. So much so that the future tenure of BOT Governor, Prasarn Trairatvorakul — described as competent, but supported by the Opposition — is now in doubt.
Narongchai Akarsanee, one of Thailand's most internationally-respected business leaders, told ATI a reason for currency appreciation is that Thailand has enjoyed a current account surplus for more than a decade. "It is a  basic economic principle that if you have a surplus, the value of your currency gets stronger," he says.
With BOT intervention, the baht has softened. "There has been little buying," says Narongchai, who sits on the BOT Monetary Policy Committee.  "No central bank wants to see its currency fluctuate too much. Central banks don't mind their currencies moving one way or another, but they must follow economic fundamentals, eventually."
Too much fluctuation is not good for business management, so when currencies fluctuate too much, central banks intervene.
Narongchai says it is a matter of public record that there is a difference of opinion between BOT and the Thai Finance Minister.
"The Ministry of Finance believes baht appreciation is due to interest rates — and I am sure it is partly correct — so the view of the Minister is that the interest rate should be reduced."
However, Narongchai says, based on its analysis of empirical evidence, Thailand’s central bank has concluded that the current interest rate is at the right level. "Our interest rate  policy is to achieve overall balance. And the outcome over the last several months shows that the interest rate must be correct."
Nevertheless, the BOT's Monetary Policy Committee has agreed to hold a special meeting later in May to review the situation.
Local media reports suggest Kittiratt is pressuring BOT to cut the interest rate by one per cent, while Prime Ministrer Yingluck Shinawatra is looking for a more modest cut of 0.25 to 0.5 per cent.
However, according to some pundits, cutting the interest rate at this time will jeopardise Bangkok's chances of raising some 2.2 trillion (US$66 billion) baht for its infrastructure development plan over the next five years.
Economists believe that, as long as liquidity continues to flood the global system, the Thai baht and other Asian currencies will continue to appreciate, causing central banks considerable grief.
* Florence Chong is editor of ATI Magazine.